CMSC: The window of excess returns in the banking sector may open again. It is recommended to adhere to a long-term perspective and balanced allocation.

CMSC released a research report stating that from mid-July to mid-August, market trading volume expanded and index reached new highs, while the attention on banks has somewhat converged. The bank expects that as macro liquidity enters the peak area, the market's popular sectors will consolidate at high levels, and the window for excess returns in the banking sector will reopen. The pressure of non-standard insurance maturing has not yet ended, indicating that the mid-term market situation for banks has not ended. In the long run, the optimization of fiscal expenditure structure is gradually tilting towards subsidies in areas such as childbearing, education, and child-rearing, which is beneficial for both short-term demand and long-term supply, helping to facilitate the domestic economic circulation and benefiting the long-term absolute returns of banks. In terms of target selection, the bank suggests sticking to long-termism and balanced allocation, selecting banks in the three segmented sectors of state-owned banks, joint-stock banks, and regional banks that have superior valuation from the perspective of free cash flow and excess reserves, which would achieve a balanced allocation of dividends, recovery, and growth. Key points from CMSC include: As of August 29, 42 A-share banks have completed the disclosure of their semi-annual reports for the first half of the year. The year-on-year revenue, PPOP, and net profit attributable to the mother of the 25 listed banks for the first half of the year increased by 1.03%, 1.13%, and 0.77% respectively, showing an improvement over the first quarter of the year with an increase in revenue and net profit growth rates. If the focus for banks before and after the first quarter was on tariff impact, the current focus is on countering internal infighting. For the banking industry, the impact of countering internal infighting policies can affect future credit demand in industries where clients operate. On the other hand, how will internal infighting policies affect the industry itself and whether they will be implemented, and their impact on the industry is also important. These two aspects may resonate with each other, for example, if investment demand counters internal infighting, but credit debt supply is not controlled, it will only lead to more serious internal infighting within the banking industry. The profit improvement in the banking industry in the second quarter is not only due to the relief of bond market pressure but also because of the downslide in deposit interest rates on the liabilities side, which has a certain inertia and gives confidence to the banking industry's net interest margin. For the banking industry, the downward adjustment of deposit interest rates is a way to counter internal infighting in the liabilities side, which contributes significantly to easing the pressure on banking interest margins. However, if the asset side of the bank does not counter internal infighting in sync with the liabilities side, the dividend of reducing deposit costs may be consumed by the continued internal infighting on the credit side, which could be a key issue for the direction and expectations of banking industry internal infighting in the future. Looking at specific banks, in the post-industrial and urbanization era, the increase in the size of credit debt stock that matures is the main source of net growth pressure for the banking industry. In macro terms, this pressure can be alleviated in the short term by fiscal policy, in the medium term by inflation, and in the long term by population and new technology demand. In other words, the macro expansion pressure of banking assets cannot be resolved through micro-competition. The struggle for scale and status among individual banks ultimately leads to a prisoner's dilemma and negative sum game. Some may argue that internal infighting in banks can bring down the cost of real financing and create positive social externalities, but the bank's view differs. Encouraging funds to flow to the right operating entities that serve the real economy means that banks need to focus on the real demand entities for their financial services, and mainly consider the direction of credit. A lower interest rate could push funds towards companies that may not necessarily need them, leading to excess capacity and unnecessary debt burdens, ultimately resulting in misallocation of social resources and an increase in bad debts for banks. Lending to operating entities at appropriate rates, even if it results in bad debts, is a necessary cost to encourage social innovation and entrepreneurship. Therefore, for the banking industry to counter internal infighting, it may first need to policy guidance to establish the correct values, to ensure banks focus on the real demand entities and monitor where credit flows are going, while guarding against moral risks. It is promising to see from the financial reports that more banks are emphasizing the significance of non-credit services for the real economy and high-quality development, which aligns with the capital market's focus on the internal growth capacity of banks. To ensure that more banks focus on serving the real economy and high-quality development, institutional design and guidance at the macro policy level are also needed. During an economic downturn, internal demand for credit is usually weak, but social financing growth requires an increase in credit supply, which may exacerbate internal infighting in individual banks. To avoid this macro-micro paradox, non-credit debt within social financing, mainly government debt, should counterbalance this, forming a counter-cyclical hedge. On the one hand, economic expectations should be raised to drive credit demand, while on the other hand, the burden on the banking system from social financing growth should be reduced. Currently, the bank has established a mechanism matching the growth rate of social financing and potential rational nominal GDP growth at the macro policy level. In the future, the bank may further expect to establish a dynamic relationship between the internal structure of social financing growth and the nominal GDP gap, decomposing the social financing growth target dynamically into three systems of money, credit, and fiscal policies, forming a more refined mechanism of monetary and fiscal coordination across cycles. At the same time, by moving away from the interbank liability-based constraints towards a scale expansion pursuit, the ongoing internal infighting on the bank assets side can be avoided. A more positive change is seen from the central bank's purchase of government bonds and the governance of manual subsidies to support the local government debt through special bonds, and to the financial subsidies for consumption and childbirth. Gradually, the bank sees improvement in the related policies of the decision-making departments, and it may expect to see a gradual decrease in the internal infighting pressure on the assets side of banks in the future, with incremental potential flowing towards banks that truly serve the real economy and people's happiness needs. This represents hope for the synchronous high-quality development of the banking industry and the real economy. Risk warning: The improvement in economic fundamentals is slow, policy efforts are lower than expected, and intensified competition for deposits and term deposits.